The multi-billion-pound buy-to-let sector was dealt a number of body blows during 2015. July’s budget announced mortgage interest relief would be restricted to basic rate and, for furnished lets, the 10 per cent wear and tear allowance would be abolished in its current form.
November’s Autumn Statement announced the new 3 per cent stamp duty land tax (SDLT) surcharge, so from April individuals buying additional properties (second homes, holiday homes, or buy-to-let) suffer an extra 3 per cent stamp duty on top of the standard rates. The Bank of England also has the sector under scrutiny, which is expected to result in more stringent buy-to-let lending criteria. We have already seen Barclays increase its rent to mortgage interest ratio from 125 per cent to 135 per cent in light of the tax relief changes, and more lenders are likely to follow suit.
Entry costs increasing by 3 per cent post-April will mean buy-to-let purchases are likely to fall in 2016, but this should not have a significant effect on the overall housing market. Although the numbers of buy-to-let transactions have risen quite significantly over recent years, these still represent a relatively small proportion of the overall property market. Mortgage Lenders and Administrators Return statistics from the Bank of England and the FCA show buy-to-let mortgages still make up the smallest part of the market at around 15 per cent of gross mortgage advances. Generally, it is landlords with higher incomes, large portfolios and higher loan to values who get hit hardest by the mortgage interest relief changes, so there will be a shift toward low loan to value and cash purchases in future where investment is for growth and income.
Corporates and funds
The 3 per cent SDLT surcharge will not, however, apply to “corporates or funds making significant investments in residential property, given the role of this investment in supporting the Government’s housing agenda”, says the Government. It adds that “The Government will consult on the policy detail, including if an exemption for corporates and funds owning more than 15 residential properties is appropriate”.
It is apparent that more professional landlords have been incorporating businesses recently, enabling them to efficiently offset mortgage interest against rental income. Incorporation may also exempt purchases from the 3 per cent SDLT surcharge, depending on the consultation outcome.
The fundamentals of the asset class have not changed, and the UK still needs over 250,000 new homes each year to keep pace with the needs of a rising population. Only around half that number is being supplied – constrained by funding, planning, and availability of labour and materials. This supply/demand imbalance serves to drive up capital values and rents.
Political awareness of the problem is high, and the Autumn Statement introduced initiatives to encourage more house building. But these will not deliver in the short-term, so a slowdown in demand from buy-to-let investors could help to take a little heat out of the market and perhaps return house prices to a more stable trajectory. However, the result is also a slowdown in the supply of new properties to let, which will drive up rents and make the private rented sector more attractive to investors.
Attracted by the stable long-term total return profile, it will be professional investors – institutions, funds and corporates – who now take the private rented sector forward. Individual retail investors and hobbyist landlords will be able to access the asset more efficiently via funds.
It is evident many more retail investors, wealth managers and even existing buy-to-let investors are recognising residential property funds can now offer a real alternative to traditional buy-to let. The power of bulk-buying assets, property management and exemption from the SDLT surcharge mean funds can attain property at lower costs compared with the average buy-to-let investor.
The pooled nature of funds also mean they can provide investors with exposure to a larger and more diverse portfolio of properties, thereby reducing the risks associated with tenant arrears and voids.
David Gibbins is manager of the TM Hearthstone UK Residential Property fund